Fitch Affirms France at 'AA+'; Outlook Stable

(The following statement was released by the rating agency)
LONDON, June 13 (Fitch) Fitch Ratings has affirmed France's
Long-term foreign
and local currency Issuer Default Ratings (IDR) at 'AA+'. The
Outlooks are
Stable. The issue ratings on France's unsecured foreign and
local currency bonds
have also been affirmed at 'AA+'. At the same time, the agency
has affirmed
France's Short-term foreign currency IDR at 'F1+' and the
Country Ceiling at
'AAA'.
KEY RATING DRIVERS
The affirmation and Stable Outlooks reflect the following
factors:
France's budget deficit improved by 0.6ppt to 4.3% of GDP in
2013, although this
was slightly worse than the 4.1% target presented in the 2014
draft budget in
October. Fitch no longer forecasts the French government will
meet the EU
threshold for the general government fiscal deficit of 3% of GDP
by 2015, but
any slippage will be modest. The government has provided more
detail on its
consolidation measures, in particular on the EUR50bn planned
expenditure cuts
(relative to prior rising trends) from 2015 to 2017, and the
recent June
supplementary budget detailed an extra EUR4bn of spending
savings this year and
additional tax relief to households than announced originally.
However, the
consolidation plans are unprecedented in recent times and
meeting expenditure
targets will be challenging.
Fitch does not expect any material slippage from medium-term
structural fiscal
targets in the 2014 budget of close to balance by 2017, although
this was
loosened from the original benchmark of balance by 2016 in the
September 2012
multi-annual public finance programme. In its latest assessment
of public
finances, the High Council of Public Finances (created to
improve the
credibility of fiscal policy) states the structural fiscal
deficit in 2013 is
significantly worse than the benchmark in the 2012 law,
triggering the
corrective action mechanism of the new fiscal framework. In the
2014 budget, the
government has already increased its consolidation efforts by
0.3% of GDP this
year and by 0.2% in 2015 to bring the structural balance closer
to the
trajectory of the benchmark.
Government debt dynamics remain broadly unchanged from Fitch's
previous rating
review in December 2013. Gross general government debt (GGGD) is
high (93.5% of
GDP in 2013), more than double the 'AA' median of 37.7%, thus
limiting the
fiscal scope to deal with shocks. Close implementation of the
consolidation
plans should mean a peak of the debt to GDP ratio at around 96%
in 2015, after
which it should be on a downward path. The French government's
latest forecast
has been revised up to similar levels. The pace of decline in
the debt ratio
will ease slightly reflecting the modest loosening in fiscal
targets in 2015 and
2016. Recent new national accounts data by the French national
statististics
office showed GGGD lowered by nearly 2pp in 2013. Fitch will
base its forecast
on the revised data after all countries in the EU switch to the
new ESA2010
methodology by September.
Economic activity should pick up in 2014 after virtually no
change in GDP in the
previous two years. Fitch expects growth to pick up from 0.3% in
2013 to 0.7% in
2014 and estimates medium-term potential growth at around 1.5%,
broadly
unchanged from the last review. However, economic performance
has remained
volatile in recent quarters with growth stalling in 1Q14,
suggesting the economy
is struggling for momentum. The unemployment rate is also
elevated and the
number of jobless people has reached a record high. There is
also uncertainty
over growth prospects in the medium term and on the impact of
reforms already
announced.
France continues on a gradualist approach to economic reforms.
Since coming into
office in 2012, the socialist government has set out and started
to implement a
reform agenda. More recently there has been an increasing focus
on supply side
economic reforms. Among the main policy measures is the EUR10bn
planned cuts in
payroll tax, which is in addition to the EUR20bn tax credit to
firms announced
in 2012. Together they are commensurate with the increase in
overall business
taxation since 2010. Further measures to boost margins were also
announced in a
EUR25bn stimulus package for firms and households. However, the
quantitative
impact of recent structural reforms is uncertain, and in Fitch's
view does not
appear sufficient to reverse the trends in long-term growth and
competitiveness.
While the current account balance has generally been on a
deteriorating trend
for the past 10 years on France's loss of export market share,
at 1.3% of GDP in
2013 the deficit is not excessive. Fitch projects the deficit to
stabilise
around current levels. However, France's net external debt is
significantly
higher than most rating peers.
There is reduced risk from contingent liabilities. The financial
sector in
recent years has been cleaning up its balance sheets,
strengthening funding,
liquidity, capital and leverage. The risks from the eurozone
crisis management
mechanism including the EFSF and ESM have also eased owing to
the actions of the
ECB and the on-going economic recovery of the single currency
area.
Fitch judges financing risk to be low, reflecting an average
debt maturity of
seven years, low borrowing costs and strong financing
flexibility.
France has a wealthy and diversified economy. It has a track
record of relative
macro-financial stability including low and stable inflation. It
also benefits
from moderate levels of household debt and a high household
savings rate.
Political stability is entrenched by strong and effective civil
and social
institutions.
RATING SENSITIVITIES
The Stable Outlook reflects Fitch's assessment that upside and
downside risks to
the rating are currently broadly balanced. The main factors that
could lead to a
negative rating action, individually or collectively, are:
- Public finances weakening compared with Fitch's baseline
projections or
greater uncertainty over the implementation of budget
consolidation efforts.
- Continued deterioration in competitiveness and decreased
confidence in growth
prospects.
The main factors that could lead to a positive rating action,
individually or
collectively, are:
- Sustained lower budget deficits, leading to a track record of
significant
decline in the GGGD ratio from its peak.
- A significantly stronger economic recovery of the French
economy and greater
confidence in medium-term growth prospects owing to sustained
implementation of
deep and comprehensive structural reforms.
KEY ASSUMPTIONS
Fitch expects the French economy to grow at a slower pace than
the eurozone
aggregate for the first time in four years in 2014 at 0.7%.
Economic growth will
remain below France's long-term potential until 2016.
Fitch expects the government to stick close to its budgetary
targets, with
modest slippage. Our deficit projections are slightly higher
than official
forecasts owing to weaker growth, more cautious assumptions on
the elasticity of
revenue to GDP and uncertainties on spending cuts.
Fitch does not expect any additional debt increasing support to
the eurozone
than already budgeted. France's contribution to the financial
assistance
programmes of the single currency will climb to EUR68.7bn in
2014 (3.3% of GDP)
mostly on further disbursements to Greece from the EFSF and
capital
contributions to the ESM. Fitch also does not expect further
government debt
raising interventions to support the French banking industry.
Fitch assumes France and the eurozone as a whole will avoid
long-lasting
deflation, such as that experienced by Japan from the 1990s.
However, the weak
inflationary environment will make the balance-sheet adjustment
of the public
and private sectors more challenging over the medium term. The
agency assumes
the gradual progress in deepening fiscal and financial
integration at the
eurozone level will continue; key economic imbalances within the
currency union
will be slowly unwound; and eurozone governments will tighten
fiscal policy over
the medium term.
Contact:
Primary Analyst
Enam Ahmed
Director
+44 20 3530 1624
Fitch Ratings Limited
30 North Colonnade
London E14 5GN
Secondary Analyst
Ed Parker
Managing Director
+44 20 3530 1176
Committee Chairperson
Richard Fox
Senior Director
+44 20 3530 1444
Media Relations: Francoise Alos, Paris, Tel: +33 1 44 29 91 22,
Email:
francoise.alos@fitchratings.com; Peter Fitzpatrick, London, Tel:
+44 20 3530
1103, Email: peter.fitzpatrick@fitchratings.com.
Additional information is available on www.fitchratings.com.
Applicable criteria, 'Sovereign Rating Criteria' dated 13 August
2012 and
'Country Ceilings' dated 09 August 2013, are available at
www.fitchratings.com.
Applicable Criteria and Related Research:
Sovereign Rating Criteria
here
Country Ceilings
here
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